Bank of America in talks to acquire Merrill Lynch

From Times staff writer E. Scott Reckard:

Bank of America Corp. is in talks to buy brokerage giant Merrill Lynch & Co., in a deal that could help limit the repercussions from the expected demise of investment bank Lehman Bros. Holdings Inc.

In a day of extraordinary upheaval on Wall Street, BofA decided against buying Lehman without government assistance and instead entered negotiations to acquire Merrill Lynch, according to a person familiar with the discussions.

The potential combination of BofA and Merrill, first reported by the Wall Street Journal, could ease fears of calamity in the financial system stemming from the possible bankruptcy of Lehman.

Merrill is considered to be vulnerable because, like Lehman, it has suffered heavy financial hits from soured mortgage-related investments.

Merrill’s shares dived 36% last week, to end Friday at $17.05, a 12-year low.

BofA may agree to pay between $25 and $30 a share for Merrill, the New York Times reported today.

The Wall Street Journal reported that BofA had made an offer worth $29 a share, valuing Merrill at about $40 billion. Merrill's shares hit an all-time high of $97.53 in January 2007, just before the first major signs of the current global credit crunch began to emerge.

UPDATE: The Wall Street Journal reported at about 6 p.m. PDT that Merrill and BofA have agreed to a deal worth $29 a share, or about $44 billion. It will apparently be a stock swap.

Charlotte, N.C.-based Bank of America, with $1.7 trillion in assets, is considered fundamentally healthy. But it also has seen its capital eroded by losses on mortgage securities and by the costs of acquiring Chicago’s La Salle Bank last year and taking over Calabasas-based mortgage lender Countrywide Financial Corp. this year.

For BofA CEO Ken Lewis, a deal to buy Merrill would give the banking titan a far larger presence in the wealth-management business. Merrill, under CEO John Thain, employs 16,700 financial advisors who oversee $1.6 trillion in client assets. But BofA also would be taking on the risk of deeper losses in Merrill's own portfolio of mortgage securities and other investments.

BofA's arch-rival, JPMorgan Chase & Co., bought failing investment bank Bear Stearns Cos. in March, in a rescue overseen by the Federal Reserve.

Spokesmen for BofA and New York-based Merrill declined to comment today.

However, a person close to the situation, who was not authorized to make public comments, said BofA shifted its focus to Merrill, and away from Lehman, because U.S. Treasury Secretary Henry M. Paulson Jr. had declined to provide any government "backstop" for a Lehman deal.

After spending three days looking into Lehman, BofA couldn’t gauge what Lehman’s losses might turn out to be on toxic real estate investments, "and just couldn’t commit" on such short notice to proceeding on its own, this person said.

The source wouldn’t discuss how much of a government guarantee would have been necessary for BofA to agree to buy Lehman.

The source also said the talks on a deal with Merrill were highly fluid.

Photos: Outside Merrill Lynch's headquarters in New York (Justin Lane / EPA); a BofA branch (Chris Hondros / Getty Images)

Comments

[adam]

I will quit my job at Merrill if BofA buys us

[Mike Foxton]

Thank you Stan O'Neal and his corrupt buddies

[MisterEight]

All hail the East Coast.

Meanwhile, we're just entertaining the world and building the future out here.

[SandyC]

Stan O'Neal should be drawn and quartered for running Merrill into the ground the way he did! When will the boards of directors stop rewarding exiting CEOs with millions of dollars?! What a sad ending - but not as bad as it could have been, of course. Being sold is better than going bankrupt!

[HelloBofA]

Thank you messrs. O'Neal and Komansky--the Laurel and Hardy of crooked finance.

[H.Craig Bradley]

Sure looks like the credit-mortgage crisis is as bad or worse than the Savings and Loan Crisis of the late eighties and early nineties. Once again, history repeats itself.

Unlike Freddie Mac and Fannie Mae, there are no foreign creditors (bond holders) demanding the Federal government bail out poor Lehman Brothers. Japan, China, and Russia are not holders of Lehman Brothers debt, so they can fail with no international repercussions, which is what it appears will happen.

[Whiteknight]

Awww. Superrich like to rape poor Middle class taxslave like me. God bless America.

[Matt Lechner]

While not lacking in controversy, due in part to the market context - this should prove to be a solid business combination. Congratulations to both and best wishes for future success from WSSIG !

Matt Lechner - CFP, CRPS, CIMA, FRM
Chairman - WSSIG, the Wall Street Special Interest Group

[R Downer]

Looks like Morgan Merrill did not have a good ring to it.

[James Monachino]

Is Bank of America Cooking a Ruinous Stew?

First Countrywide and now Merrill Lynch plus whatever Bank of America is holding in their own original portfolio. The question is can Bank of America swallow two hand grenades exploding in its stomach at the same time? At a time when financial firms are tightening up just to survive Bank of America is loading up on problem loans.

Buy them when they are cheap. Sounds like a good plan. But I wonder why Merrill sold so quickly? An International deflationary slowdown requires different remedies than an inflationary scenario. Debt becomes toxic and cash becomes king.

Time will judge if Bank of America was brave and bold or to shallow thinking and foolish. I remember reading in variety of books from the 1930's era that stated, "Just when you thought you hit bottom and it couldn't get any worse, it would."

Keep a low financial profile and hunker down for this multi year financial storm to pass.

James Monachino

[martscan]

Adam: I'm curious, what will you do now?